Snapshot
Illinois Tool Works Inc reported $4.06B of revenue in Q3 2025, up 2.3% year over year, with diluted EPS of $2.81 and an operating margin of 27.4%.
- Revenue
- $4.06B
- YoY growth
- +2.3%
- Diluted EPS
- $2.81
- Operating margin
- 27.4%
What management said
- •Good day, everyone, and thank you for joining us for today's ITW Third Quarter 2025 Earnings Webcast.
- •During today's call, we will discuss ITW's third quarter financial results and provide an update on our outlook for full year 2025.
- •For the third quarter, revenue increased 3%, excluding a 1% reduction related to our ongoing strategic product line simplification efforts.
- •Organic growth was 1%, a solid performance relative to end markets that we estimate declined low single digits and a 1 percentage point improvement from our second quarter growth rate.
- •Focusing on the bottom line, we achieved GAAP EPS of $2.81, grew operating income by 6% to a record $1.1 billion, and significantly improved our operating margin by 90 basis points to 27.4%.
- •Consistent with our long-term commitment to increasing annual cash returns to shareholders, on August 1, we announced our 62nd consecutive dividend increase, raising our dividend by 7%.
- •Furthermore, I'm encouraged by the significant progress on our next phase strategic growth priorities.
- •We remain laser-focused on making above-market organic growth powered by customer-backed innovation a defining ITW strength.
- •I will now turn the call over to Michael to discuss our third quarter performance and full year 2025 outlook in more detail.
- •Starting with the top line, total revenue increased by more than 2%, driven in part by 1% organic growth, an improvement of a percentage point from Q2.
- •Geographically, while North America organic revenue was flat and Europe was down 1%, Asia Pacific was a standout performer with a 7% increase, which included 10% growth in China.
- •Our enterprise initiatives were particularly effective this quarter, contributing 140 basis points to a record operating margin of 27.4%, which expanded by 90 basis points year over year.
What went well
- •Third quarter revenue increased 3% excluding a 1% reduction from strategic product line simplification, with organic growth of 1%, a 1 percentage point improvement over the second quarter against end markets management estimated declined low single digits.
- •Operating income grew 6% to a record $1.1 billion and operating margin improved 90 basis points to a record 27.4%, with enterprise initiatives contributing 140 basis points and pricing and supply chain actions more than covering tariff costs.
- •GAAP EPS was $2.81, up 6% excluding a prior year divestiture gain, and incremental margins reached 65% in the quarter.
- •Free cash flow grew 15% to more than $900 million with a conversion rate of 110%.
- •Automotive OEM led with 7% revenue growth and 5% organic growth across all three regions, including 10% growth in China, while its operating margin improved 240 basis points to 21.8%.
- •The company announced its 62nd consecutive dividend increase, raising the dividend 7%, and repurchased more than $1.1 billion of shares year to date.
What went wrong
- •Demand remained choppy through the quarter, with a strong June and July followed by a pronounced slowdown in August and a more normal September, and green shoots in test & measurement and semiconductor order rates from the prior quarter did not materialize.
- •Test & measurement and electronics revenue was flat with organic revenue down 1%, as capital equipment demand stayed choppy and electronics declined 2% on slower semiconductor-related markets.
- •Polymers & fluids revenue declined 2% with organic revenue down 3%, including a 1 point PLS headwind, as polymers fell 5% against a difficult prior year comparison.
- •Construction products posted an 11th consecutive quarter of organic revenue declines, down 2% organically in the quarter.
- •Management indicated the company is trending toward the lower end of its full year organic growth guidance range.
Guidance changes
| Metric | Period | Previous | Current | Change |
|---|---|---|---|---|
| Organic growth | FY2025 | 0% to 2% | 0% to 2% (trending toward low end) | Maintained range, narrowed expectation toward low end |
| Total revenue | FY2025 | — | Up 1% to 3% | — |
| EPS | FY2025 | — | Narrowed range | Narrowed; lower tax rate benefit not flowed through due to revenue trending lower |
| Effective tax rate | FY2025 | — | 23% full year | — |
| Effective tax rate | Q4 2025 | — | 24% to 25% | — |
| Automotive OEM outperformance vs industry builds | FY2025 | — | 200 to 300 basis points | — |
Performance breakdown
| Metric | YoY change | Reason |
|---|---|---|
| Total revenue | Up ~2% (3% excluding 1% PLS reduction) | 1% organic growth plus 2% favorable foreign currency, partly offset by strategic product line simplification |
| Operating margin | Up 90 bps to 27.4% (record) | Enterprise initiatives contributed 140 basis points; pricing and supply chain actions more than covered tariff costs |
| GAAP EPS | Up 6% to $2.81 (ex prior year divestiture gain) | Operating income growth and margin expansion; effective tax rate of 21.8% aided by 2024 U.S. tax return filing benefit, partly offset by foreign tax audit settlement |
| Free cash flow | Up 15% to more than $900 million | Strong operational execution, 110% conversion |
| Automotive OEM operating margin | Up 240 bps to 21.8% | Strong organic growth and customer-backed innovation contribution |
| China revenue | Up 12% year to date | Automotive up 15%, test & measurement/electronics mid-teens, welding up 20% plus, fueled by customer-backed innovation and EV penetration with Chinese OEMs |
Earnings call themes & trends
| Topic | Previous mention | Current period | Trend |
|---|---|---|---|
| Enterprise initiatives driving margin | Consistently ~100 bps annually over the past decade | 140 bps contribution in the quarter; expected to continue in 2026 | Strengthening |
| Customer-backed innovation (CBI) | 2% contribution last year, doubled since 2018 | Trending 2.3% to 2.5% this year, on track for 3% plus by 2030 | Rising |
| Tariff and price/cost | Earlier-year exposure being mitigated | Price cost positive on dollar-for-dollar and margin basis; back to a more normal environment | Improving |
| Demand environment | Mixed/challenging | Choppy, with month-to-month swings; still challenging | Stable but soft |
| Product line simplification (PLS) | ~50 bps maintenance run rate long term | Slightly elevated this year, especially in specialty products repositioning | Elevated near term |
Q&A summary
Why are construction margins still rising despite an 11th straight quarter of organic declines, and can margins move higher when revenue inflects?
Margins reflect the high quality of the construction portfolio and operating in the most attractive parts of the market with strong business-model execution; management is confident growth will return at high quality when markets recover.
What gives visibility to test & measurement improving in Q4?
A normal cyclical Q4 improvement is expected; Q3 was hurt by CapEx softness tied to Q2 tariff uncertainty and a deceleration in semiconductors (about 15% of the segment), both of which are expected to get somewhat better.
With FX and a lower tax rate now tailwinds, why isn't guidance higher?
Management is taking a more measured, cautious approach given the choppy demand environment with one quarter left; FX is only a few pennies of tailwind, and the full-year tax rate is now 23%.
Should PLS remain around 1% in coming years?
PLS is a bottom-up, division-driven activity with no 2026 number yet; long-run maintenance is around 50 basis points, with more this year, and it remains a value-creating part of the 80/20 process.
How should we think about 2026 incremental margins and the spread between CBI and PLS?
Enterprise initiatives should again drive roughly 100 basis points of margin improvement and incrementals likely above the historical 35% to 40% range; CBI and PLS are independent, but the net spread should widen and contribute more to above-market organic growth.
What is driving the strong China performance?
Automotive, particularly EV penetration with Chinese OEMs and rising content per vehicle, plus customer-backed innovation across welding, test & measurement, and polymers & fluids.